Note: the whole report (with charts and the Annex) is available for download in PDF format. Click here.

Moldova's Economy Is Drifting, But Apparently Not For Long

Drift, as it is known, is the motion of something propelled by the current. In the first quarter of 2001 Moldova’s economy found itself in a similar situation, being already “set free” by the Government of D. Braghiş who was very busy with his election activities, but not being accepted yet by the Government of V. Tarlev.

What are the peculiarities of this drifting?  It turned out that the results of the Q1 2001, according to the official statistics are not so bad. Industry, as compared to Q1 2000, showed a growth (+3.1%); there were positive shifts (mainly, thanks to the private sector) in construction, traffic turnover (+20.0%), volume of sales (+8.6%), and paid services (+2.2%). Foreign trade turnover has also increased. Inflation was not a big problem, as well: it cumulatively amounted in Q1 to 1.8%, while National Bank of Moldova’s target for the end of the year is 10%.

Thereby, the positive result of the first quarter in some way confirmed the traditional slogan of entrepreneurs towards the state: “Please, just don't disturb us!” 

As if this slogan has been heard, beginning with the second quarter, according to the Government Program “Rebirth of Economy is the Rebirth of State”, approved by the Parliament on April 19^th, real sector was promised not to be disturbed, but to be supported by state with privileged credits, long-term investments, reduction of tax burden and corruption, export promotion, etc.

Meanwhile, in the real sector of economy the private sphere continued to expand in the first quarter of 2001 (it gives 2/3 of total industrial production), and the number of state enterprises continued to decrease (it reduced by 63 units as compared to the 1^st quarter of 2000). Unexpectedly the number of limited companies (LTDs) started to grow – they are more than 32 thou now (it's a 10% annual growth). It seems to be partly connected with Investment Funds’ “initiatives”.

A new phenomenon for the Spring of 2001 is the 175.4 thou private farms – twice more than in last spring. They use 394 thou ha of land, on average 1.83 ha per farm. But this figure is deceptive. There is an active process of land tenure concentration based on land leasing. According to CISR estimations (there were questioned 464 lessees and 1476 proprietors of land quotas from 326 villages, March 2001), more than 80% of lessees possess 100 ha of land and more, and every 4^th of them leases from 501 tо 1000 ha. In the nearest past the average kolkhoz possessed 1.5 thou ha of land. Now it is the state’s turn to put into order this mostly spontaneously developing process.

There are slightly more than 2 thou enterprises with foreign investments, however, only 7% of them have an equity of more than 500 thou USD. Besides Russia (42.8% of investments in statutory capital), Spain (11.7%), USA (11.0%), France (4.4%), and Germany (3.7%), Liechtenstein still stands out (3.1%), probably due to some “Moldovan participation”. The share of our neighbors – Romania and Ukraine together is less than 3%. Main branches of investments are industry, energy sector, transport and trade; while agriculture – so far only 1.4%. Enterprises with foreign participation have 30 thou employees, it's an annual increase by 6 thou of new working places, and average monthly wage there, is twice higher than the country average.

External environment for the producers means, first of all, legal base and financial sector. Legal base was continuously updated (Law “On Entrepreneurial Cooperatives”, etc), and financial sector was more or less loyal. Thus, commercial banks granted twice more credits than last year. The share of repaid credits in January-February, for instance, was 95%.

The average monthly inflation for January-April comprised 0.8% as compared to 1.5% in 2000 and 2.4% in 1999.

Less encouraging was the leu's behavior. Evolution of the nominal exchange rate of the Moldovan leu against the US dollar was in the first 5 months of 2001 on a depreciating path. While in 2000 the leu has depreciated against the US dollar by 6.8% (expressed in domestic currency terms), following the depreciation in 1999 by 39%, then in January-May 2001 the nominal depreciation has already constituted 5.8%, leu sliding from 12.38 lei/1US$ at the beginning of the year, to 13.099 lei/1US$ on May 22, and afterwards action from NBM was needed. Together with common seasonal factors, this was probably influenced by some populist promises of new Government.

However, it should be mentioned the fact that the evolution of real exchange rate of leu upon US dollar remained stable during the first 4 months of 2001, due the low level of inflation.

Despite the depreciation of leu and higher demand for dollars in the foreign exchange market, NBM still managed to buy some hard currency from banks: while in 2000 NBM bought from commercial banks US$60m, in the first 4 months of 2001 it has bought $4.4m, which where very welcomed, notwithstanding the heavy burden of the foreign debt service. In Q1 the government had to make about $16m in foreign debt service, and NBM - $5.6m, while the projected figure for whole 2001 is as high as $85m for the government, and $24m for NBM. In the absence of foreign financing the government will obviously have serious difficulties in making those payments in time. Total external debt of the state as of 1.05.2001 was $771.8 million. Internal debt, on the other hand, has increased from the beginning of the year by $71.4 m (3.5%) and comprised 2093 mil MDL, mainly due to the increase of state securities issue in order to finance budget deficit.

For more details see the Annex: “Macroeconomic Trends, Jan.-May 2001” (contained in the PDF file - see the link in the beginning).

It is well known, that the working environment of economic agents directly affects their fiscal discipline. Estimates show, that the average level of budget collections was 59.3% during 4 months of 2001 for whole Moldova, including: municipality of Chisinau – 55.9%, judetses Balti – 42.9%, Lapusna – 33.5%, and in Gagauzia – 31.9%. The group of 480 enterprises, included by the Ministry of Finance in the category of “large tax payers”, paid to the budget during January-April only 77.8% of needed payments. Among them – enterprises of energy sector and industry, including alcohol producing and tobacco fermenting plants.

Industry in the first quarter recorded a 3.1% growth and this is a good sign, because starting with the 2^nd quarter a new season in food industry begins, and weather conditions so far inspire optimism. A growth of industrial production in Q1 is guaranteed, mainly on the account of light industry (ready-made cloth production  +15%, footwear production +29%, textile products +39%), mechanical engineering and by the set of food industry branches. Notable is the decline in cigarette production by 22% and fermented tobacco production by 12%.

It is encouraging the activization in constructions sector, notwithstanding the fact that economic agents from Chisinau municipality executed 80% of all construction works. The housing construction has increased in Q1 by 2.1 times (!), mainly in Chisinau municipality and its suburbs. Construction business has finally become profitable, and this is one of signs of our adaptation to the market economy. It is important that besides large imports of construction materials from abroad, in Q1 there was an increase in production of local construction materials and timber production (+21%), as well as of paints and varnishes (4 times).

In transport sector there was an increase of passenger and cargo traffic, both by rail and by trucks, and in communications – increase in telephone services, mainly long-distance.

Agriculture, as a year ago, recorded a reduction of volume of production by 8% in Q1 (in comparable prices). However, this key branch for Moldovan economy also shows signs of adaptation. There are practically no wastelands in the country. Share of grain crops and technical crops has rapidly expanded, these crops being mainly export-oriented. Planting of vineyards and gardens has restarted. More than 90% of livestock is concentrated in individual households, and it is important that at the same time integrity of livestock is ensured – the loss of cattle was 1.7% in Q1 as compared to 2.5% in Q1 of the last year. There is also an increase of milk and eggs production.

After the completion of National Program “Pământ”, agriculture entered the not less important post-privatization period, when in the foreground there is a need in formation of new structures – cooperatives of real land owners, farmer households associations, enterprises of technical, agro-chemical, transport, trade-supply and other services. It is clear that state’s trusteeship, including financial support will be decisive. Here if we take into account that the sum of credits granted to the agriculture in 1999 by commercial banks and other financial institutions was 84 million lei, and in 2000 – 130 m lei, then on one peasant household falls in average several hundreds of lei, while the minimal needed set of equipment, not the most expensive one, is estimated at 15-20 thou USD.

Investments in national economy still remain a weak point in its development. In the 1^st quarter of 2001 it received only about $10 million (112.3 million lei) of investment, which is less than in Q1 of the last year by 30% (!), including investment in objects of productive destination. Contribution of economic agents – was 56%, state budget – 11%, and foreign investors – only 18%. In such circumstances of low investment activity it will complicated to achieve the forecasted 5% growth in real GDP this year.

The increase of Moldova’s attractiveness to foreign partners is a burning issue for the new Government as well. From early 90s the Republic of Moldova, without Transnistria, has accumulated $451 m of foreign investments ($123 per capita), including in 1998 – $86m, in 1999 – $34m, and in 2000 – $115m, out of which one third from Union Fenosa. The slow and not streamlined process of privatization, observed from the beginning of the year, certainly does not strengthen at all the optimism of our foreign partners.

External trade turnover during January-April 2001 has increased by 14.4%, including export – by 20.3%, and import – by 10.7%. Growth in volume of exports to the EU countries  was 23.4% and to CIS countries by 23.2%; at the same time the export to countries of the Balkan-Carpathian region increased, including Romania – by 54.9%. Share of light industry in total export is gradually increasing: during January-April from 14.9% to 17.5%, and share of mechanical engineering – from 3.6% to 7.5%. Share of energy products in import has significantly decreased from 40.4% to 31.7%, while share of machinery decreased from 13.6% to 13.2%. At the same time, trade balance deficit for the first 4 months of 2001 was $85.8m that is $5.3m more than in the same period of last year.

Orienting towards the announced state's export promotion intentions, it should be taken into consideration, that in Q1 2001 the share of private sector in export comprised 55.5%, and in import – 63.1%. Joining of WTO by Moldova has finally marked the month of May 2001, and this process took us more than 7 years. Consequences of this step are to be seen in future.

Social aspects of national economy's development from the beginning of the year have not gone through crucial changes. The employment of work able population remained on the level of last year, unemployment being estimated at 8.5% (about 140 thou people). There are about 70% of employees working in the private sector. State’s pension debt was finally cleared, and starting with March, pensions are paid for the current month. Wage arrears, on the other hand, have decreased by 108.6 million lei in Q1, but they still comprised 384.9 m lei as of the 1^st of April. However, there is an interesting fact, that the volume of population’s deposits with commercial banks has increased by 10.5%, half of them being deposited in foreign currency, which is mainly due to the remittances from Moldovan citizens working abroad. As before, an evident sign of social troubles remains depopulation (in the 1^st quarter population continued to decrease), enlargement of the area of social diseases (tuberculosis, etc) and crimes against personality and property of citizens. The unemployed commit every third crime; every fifth arrested by the police is minor.

Concluding remarks: results of the 1^st quarter of 2001 were already reported by official statistics, and from mid-April the countdown for new Government has started.  Government has the following advantages: it does not bear the responsibility for the last decade, and for the first time in many years it is backed by a guaranteed support from the Parliament majority, it can adopt most radical measures to take the Moldovan economy out of depression.  The impediments are also known. Low standard of living of the majority of population and deep differentiation of income and welfare between the “new rich” and the “new poor” are barriers for the so needed reform in social sphere, which will be hard implement without affecting at least one social group. The room for maneuvering in the field of macroeconomic policy is also limited: any increase in money supply entails inflation and leu's devaluation; any decrease – would generate an increase in non-payments, naturalization of economy, decrease of tax collection. Moreover, state's debt service commitments require additional financial resources.

Meanwhile, in April-May 2001, in spite of efforts of both Ministry of Finance and National Bank, there is even less room for maneuvers, taking into account the complicated situation in the country. The following briefly elaborates:

- Government's foreign exchange deposit at NBM has reduced considerably (from slightly over $20m at the beginning of 2001, to less than $5m at end-May) because of the need to service the external debt. This obviously means more risks to the country, provided that in mid-2001 significant amounts should be paid for debt service;

- In January-April 2001 net volume of Treasury notes (sale minus redemption) was 71 million lei, these funds fuelling the state budget. This is an impressive amount, taking into account that it is not mid-year yet, and at such pace the annual volume may exceed the figure set by the 2001 Budget Law (136 millione lei);

- Revenues of consolidated state budget are falling: 

            - There are big inflationary expectations, which may adversely affect the stability of the national currency. In the first 4 months of 2001 broad money increased by 5.4% and for the whole year NBM assumed a broad money increase by 22.6%. Such a growth in absence of real GDP growth may certainly fuel the inflation;

- Government's reserve fund is practically exhausted;

- In energy sector there is a growth in state enterprises' accounts receivable (in total 352 million lei), and this in the end leads to a growth of country's energy debts.

The paradox of current situation is that the new Government, which is supposed to do what “monetarists” did not manage to do, has now to take the country out of the crisis through realization of no less tough monetary policy, than the one carried out by their predecessors – opponents, and active continuation of structural reforms. Without this, as everybody understands, a cooperation with international financial structures cannot be expected. Meanwhile, the tiredness of the majority of the population and unpopularity of reforms will keep the Government from doing sharp moves. There will be no reversal of reforms, but their continuation could be put on hold, and that is very undesirable for everybody, including the new Government. The country extremely needs strong incentives for development.